US GAAP vs.

IFRS
Conceptual Framework
DANIKA GRACE BROWN
FALL 2014

Agenda
US GAAP Conceptual Framework
IFRS Conceptual Framework:
The Similarities and Differences Between GAAP and IASB
Conceptual Frameworks

Sources: Kieso, FASB

US GAAP Conceptual Framework

Development FASB began designing the framework in 1976.
Financial Accounting Concepts:
SFAC 1: Objectives of Financial Reporting by Business Enterprises
SFAC 2: Qualitative Characteristics of Accounting Information
SFAC 3: Elements of Financial Statements of Business Enterprises

SFAC 4: Objectives of Financial Reporting by Non-business

Organizations
SFAC 5: Recognition and Measurement in Financial Statements of
Business Enterprises
SFAC 6: Elements of Financial Statements (Replaced SFAC 3)
SFAC 7: Using Cash Flow Information and Present Value in
Accounting Measurements
Sources: Kieso, FASB

US GAAP Conceptual Framework

(Overview)
Definition:
A coherent system of interrelated objectives and fundamentals that
can lead to consistent standards and that prescribes the nature,
function, and limits of financial accounting and financial statements.
(FASB)

Its Needed Because:

1) In order to be useful, any standards must be built on an underlying
established body of concepts and objectives
2) In order to allow the profession to react to and solve new and
emerging practical problems encountered on a daily basis

US GAAP Conceptual Framework

SFAC 1 Objectives of Financial Reporting
SFAC 1 Premise:
Useful information should help users make rational decisions in regards to
investments and credit, assessing future cash flow prospects to the enterprise, and
provide evidence as to whether economic resources exist and obligations or
changes to them.
External Users
Creditors
Customers
Governmental Agencies
Investors
Vendors
Other users impacted by the enterprise

US GAAP Conceptual Framework

SFAC 2 Qualitative Characteristics

User Specific
Understandability

Information Specific:
Primary
Relevancy timely, predictive, feedback value
Reliability verifiable, unbiased, correct
Secondary
Comparable between business enterprises
Consistency between periods

US GAAP Conceptual Framework SFAC

3/6 Elements of Financial Statements

Elements:

Assets
Comprehensive Income
Distributions to owners
Equity
Expenses
Gains
Investments by owners
Liabilities
Losses
Revenues

US GAAP Conceptual Framework

SFAC 5 Recognition & Measurement

Full Set of Financial Statements:

Assumptions
Balance Sheet
Comprehensive Income
Cash Flow
Changes in Owners Equity
Concepts
Income Statement

Principles
Constraints

US GAAP Conceptual Framework

SFAC 7 Using CF and PV

It was issued on February 2000.

SFAC Addresses:
Future Cash Flows (Asset and Liability Measurement)
Present Value (Uncertainties: amount and timing)

COMPARISON OF STRUCTURE
GAAP
Board of Trustees Govern FAF

IFRS
Trustee Appointments Advisory Group
Advises the IASC

Foundation (FAF) 15 Trustees Duties:

Appoint, Oversee, and Raise Funds to operate
FASB.

Foundation (IASC) 22 Trustees Duties:

Appoint, Oversee, and Raise Funds for IASB.

Council (FASAC) At least 20 members can

be appointed; Advises the FASB and assists in
organization of task force.

Council (IFRIC) 14 members; Issues

interpretations that are approved by IASB
interpretations have same authority as standard.

Board (FASB) 7 members; Accounting

standard-setter

Council (SAC) Advises the IASB

SFAS Statement of Financial Accounting

Standards considered to be GAAP

Board (IASB) 14 members from 9 countries;

Accounting standard-setter
IFRS International Financial Reporting
Standards

DUE PROCESS
IASB exercises similar due process of FASB:
1. Agenda
2. Discussion Paper (DP) not mandatory
3. Public Hearing
4. Exposure draft issued
5. Public Hearing
6. Pre-ballot draft (usually reviewed by IFRIC)
7. IASB members ballot in favor of publication
8. Published IFRS

SPECIAL NOTE
October 2004 IASB contributed to its agenda to

develop a new framework. It was conducted with the

assistance of FASB.
July 2006 Published draft of enhanced framework
Roundtable talks are still in the process of being
conducted on this topic.
A complete framework was not expected before
2010.

OBJECTIVES
IFRS To provide information about the financial

position, performance, and changes in financial

position of an entity that is useful to a wide range of
users in making economic decisions.
Similar to GAAP Emphasis is providing useful
information to users.

UNDERLYING ASSUMPTIONS
Accrual Basis the effects of transactions are

recognized when they occur.

Going Concern
Note: IAS 1, requires management to make an assessment of an
entitys ability to continue as a going concern when preparing
financial statements.

QUALITATIVE CHARACTERISTICS
Basic agreement between GAAP and IFRS:
GAAP
1. Relevance
2. Reliability
3. Comparability
4. Consistency

IFRS
1. Understandability
2. Relevance
3. Reliability (prudence)
4. Comparability
(Includes consistency)

QUALITATIVE CHARACTERISTICS
Basic agreement between GAAP and IFRS:
1. Understandability the information must be

understandable to users who have a reasonable

knowledge of business and economic activities and
accounting.

QUALITATIVE CHARACTERISTICS
Basic agreement between GAAP and IFRS:
2. Relevance information must be relevant to the

decision-making needs of the users.

Related to materiality the threshold of cutoff point for information whose omission or
misstatement could influence the economic
decisions of users taken on the basis of the
financial statements. (Gleim, 2014)

QUALITATIVE CHARACTERISTICS
3. Reliability

(a) Free from error

(b) Neutrality
(c) Representational Faithfulness economic
reality.
Related to prudence preparers of financial statements
should exercise caution in making judgments about estimates
(assets or income are not to be overstated and liabilities or
expenses are not to be understated).

QUALITATIVE CHARACTERISTICS
4. Comparability information should be

comparable through time and across entities. Like

transactions should be accounted for in a similar
way by entities.
Related to consistency specifies that the presentation and
classification of items in the financial statements, as a general
rule, shall be retained from one period to the next, with
specified exceptions. (AICPA)

CONSTRAINTS
In the IFRS framework constraints are included
with qualitative characteristics:
Cost-benefit and timeliness: Constraints related to

Relevance and Reliability.

Materiality: Related to Relevance

ELEMENTS
ASSET A present economic resource controlled by
the entity as a result of past events from which future
economic benefits are expected to flow to the entity.
Difference with FASB: Emphasis placed on a
present asset (economic resource) from which
there will be a future economic benefit.

ELEMENTS
LIABILITY A liability is a present obligation of the
entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of
resources embodying economic benefits.
Slight change in wording:
resources embodying economic benefits

ELEMENTS
EQUITY is the residual interest in the assets of
the entity after deducting all its liabilities.
Same as GAAP definition

ELEMENTS
INCOME are increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decrease of liabilities that
result in increases in equity, other than those relating
to contributions from equity participants.
Incorporates GAAP definition of Revenue and
Gains.

ELEMENTS
EXPENSES decreases in economic benefits during
the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those relating
to distributions to equity participants.
Incorporates GAAP definition of Expenses and
Losses

MEASUREMENT BASIS
FASB:
Usually historical cost
Allows fair value
Concept # 7 addresses present value measure
IFRS:
Historical most common
Current cost / Replacement cost
Realizable or settlement value
Present value

CONCEPTS OF CAPITAL
FINANCIAL CAPITAL MAINTENANCE
CONCEPT:
A PROFIT IS EARNED..IF:

Financial amount of net assets, end of period >

Financial amount of net assets, beginning of period

After excluding any distributions to and contributions

from owners during the period.

CONCEPTS OF CAPITAL
PHYSICAL CAPITAL MAINTENANCE
A PROFIT IS EARNED..IF:

Physical productive capacity of the entity, at the end of

the period > Physical productive capacity at the beginning
of the period
After excluding any distributions to, and contributions
from, owners during the period.

CONCEPTS OF CAPITAL
Physical Capital Maintenance:

Physical productive capacity at a point in

time is equal to the current value of the
assets employed to generate earnings.
Current value embodies expectations
regarding the future earning power of the
net assets.

CONCEPTS OF CAPITAL
Main difference between financial and physical capital
maintenance:
Holding gains and losses
January 1 Item of inventory is purchased for
$50,000
December 31 The price of the item is $70,000, but
the item is not sold at the end of the year.
Holding gain = $20,000

CONCEPTS OF CAPITAL
Reporting:
Financial capital
1. Measured in dollars
2. Holding gain/loss are included in income
Physical capital
1.

2.

Measured in physical capacity

Holding gain/loss reported as a direct
adjustment to equity (separate line item)

FINANCIAL STATEMENTS
1.
2.
3.
4.
5.
6.

A statement of financial position (balance sheet) at the

end of the period.
A statement of comprehensive income for the period.
A statement of changes in equity for the period.
A statement of cash flows for the period.
Notes, comprising a summary of significant accounting
policies and other explanatory information.
A statement of financial position as at the beginning of
the earliest comparative period when an entity applies
an accounting policy retrospectively or makes a
retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial
statements.

References
AICPA. (n.d.). IFRS Resources. Retrieved 10 30, 2014, from

IFRS: http://www.ifrs.com/index.html
FASB. (n.d.). FASB Standards. Retrieved 10 31, 2014, from
FASB :
http://www.fasb.org/jsp/FASB/Page/LandingPage&cid=11
75805317350
Gleim, I. N. (2014). CMA Review. Gainesville, FL: Gleim.
Kieso, D. E. (2010). Intermediate Account. Hoboken, NJ:
Wiley.
Plumlee, M. (2010). International Financial Reporting
Standards. Boston, MA: Prentice Hall.